How to Kill a Unicorn

No, I’m not talking about slaughtering mythical beings and selling their horns on the black market like some poacher.

Instead, you’ll see how easy it is to gun down a tech unicorn—the rare start-up that has managed to juice its valuation to $1 billion or more through private investments.

There’s a bunch of these tech unicorns roaming the fertile pastures of Silicon Valley these days. You might have even heard of a few. Snapchat ring a bell? What about Airbnb? Heck, even Uber is worth upwards of $50 billion. How crazy is that?

These unicorns have effectively locked out everyday investors and instead bulked up on venture capital steroids. But now many of these beasts are prepping to jump into the public markets for the very first time. I guess these billionaire CEOs are looking to cash in once again from the IPO hype machine.

But what’s puzzling is why these companies are so eager to make the jump into a stock market that’s made a habit of slaying unicorns. Sure, we’ve been warned about lofty startup valuations over the past couple of years. But once these companies pick a ticker and sign the paperwork to go public, the crushing weight of the stock market is ready with a reality check…

Square is the latest unicorn to file for an IPO. The payments startup is ready to jump into the deep end— even though there isn’t enough water in the pool.

“Square said it expected to price 27 million shares at $11 to $13 each,” Yahoo! Finance reported last week. “Underwriters have an option to sell another 4 million shares. That would raise about $400 million and value the company at $4.2 billion at the high end of the range, which is far below the $6 billion valuation Square received in a final round of private capital raised last year.”

But here’s the kicker: “It is still possible that Square’s underwriters could find unexpectedly strong demand for the shares over the next week or two and raise the initial offering price.”

Wrong!

Just yesterday, Square says it expects to open trading below its initial $11 to $13 price range.

That little tidbit shouldn’t surprise you. The IPO market has been sucking wind this year. I’ve been beating the drum about crappy IPOs for months now. Just last week I reminded you that it’s imperative to wait for the initial hype to die off before throwing any money at these wild stocks.

While the major averages push toward reclaiming their summer highs, the Renaissance IPO ETF remains stuck near its August lows. It’s down nearly 14% over the past six months alone. And there are plenty of recent IPOs that look far worse than this IPO ETF suggests.

But for whatever reason, these facts aren’t stopping the unicorns from stampeding toward the public markets.

Here’s what awaits the Squares of the world…

According to Vator News, 40% of unicorn IPOs since 2011 are now below their pre-IPO valuations. And Yahoo! Finance is quick to note that Box, Zynga, and Pure Storage are among the unicorn corpses on Wall Street.

Square’s failure to immediately launch to higher prices this week could spell doom for the other unicorns waiting in the wings. If they have any sense at all, they will stay in their Silicon Valley bubble instead of taking their chances on the Nasdaq.

If you want to kill a unicorn, just put it on the open market. Once it’s out there, it stands to die a very public death…